Value Cash — Questions & Answers
Answering Some of the Most Pertinent Questions About Value
C. in China writes: “Having read your value cash article at Medium, I get it now. I just have a couple of questions.”
Great questions! The following are the answers to these well-engaged and thoughtful responses to the value cash article we posted yesterday!
Value Cash sounds interesting but what if there is no price inflation of the cash over the asset it is supposed to purchase? Are you not left with a zero-sum return?
Undoubtedly there will be quite long periods where the value cash trades either at a discount or at parity with the underlying assets. In fact, we see this already right now with respect to FUTX, a short-cycle synthetic Ether mining financial instrument traded at Cryptopia and on Crex24. For many months, FUTX has been trading at a discount to the relative amount of Ether that it will repurchase at the end of May, 2018. Discounts might happen for a number of reasons, but usually it is because of an insufficiently liquid market for the synthetic asset (in this case FUTX, or indeed our hypothetical BUF token) or simply because there is not enough interest in the underlying asset being made available for purchase. In the case of FUTX, partly it has been a bit of both: as crypto markets have been falling, the instrument has consistently traded at a discount to Ether in the smart contract. In such a case, the available cash for purchase presents wonderful net present value as an investment as in essence, it is cash trading at below the intrinsic cash price of its own asset base!
For the issuer, this can be a troubling period of uncertainty and can extent to quite a long time, it must be said, so the story told in the value cash discussion of the straight-line return premium Alan is justified on his Berkshire shares is not strictly speaking anything more than a fairy tale event. While Alan will ultimately make the sorts of returns being presented in the case, it is not the case that the returns will present in exactly the way outlined (rather, they will come after a much larger jump in the securities cash price most likely, where one minute a 10% discount to intrinsic value is present and the next minute a 55% premium to intrinsic value appears; such a reversal may be because of any number of market or event-specific factors).
Why do you assume a 10% premium per $37,500 of value cash sold in the previous example? What would justify a premium for value cash assets?
We assume such a premium only to conceptually make value cash an easier concept to grasp, and specifically, the idea of private currency seigniorage an easier concept to grasp. Seigniorage is not a concept many people are that familiar with so it is worth taking the time to go into detail here a bit about. Seigniorage dates back to the Holy Roman Empire, from the time when brass and other metals were used to mint coins. Because the actual minting of the coin is a labour-intensive (read: cost-intensive) process, and thus requires financial support, the value of the coin could never reflect the actual value of the metal in it. There would always need to be a premium justified on the currency unit concerned. Thus, the Roman Empire (and later the British banks, which basically just copied Caesar’s factory banking process) used to “mark-up” the cost at which coins it minted were sold over and above the value of the base metals that was used to present in them. Thus, a British pound never equalled in weight precisely a pound of silver, but rather, something in excess of a pound of silver, in real money terms.
Later on, in the 1200s-1400s, when weight was replaced with the idea of value en specie, whereby a one pound coin now represented one pound of silver that could be exchanged at the bank upon demand, the concept of seigniorage grew in terms of importance quite substantially. Today, it is the way in which most governments, unbeknownst to their public electorates, finance pretty much all public spending they cannot meet through tax revenues. Between 1960–1980, seigniorage revenues increased 15-fold in the United States, to $15 billion; they are not well in excess of a trillion dollars a year!
Thus, premium’s on cash manufacturing are commonplace to those who are in the business of manufacturing and selling cash products! In the case of value cash, of course, we are not backing the cash with any sort of asset, but rather, we are ascribing the asset a purchase significance that will in return cause the cash asset to reflect the asset value of what is being purchased. The effect however, is similar. The idea that a digital unit of currency would trade at a premium to the specific asset that is being purchased (or that is backing it) stems from the notion of two principle ideas:
1) The cash is in shorter supply than the underlying / purchased asset
2) The cash can be used for a wider variety of purposes other than purely purchasing the ascribed assets
In such a case, value cash assets would be expected to trade at a premium to the ascribed purchase assets, since the wider utility of the value cash asset combined with the more (comparatively) limited supply of the value cash assets versus the ascribed purchase assets they are purportedly in circulation in order to purchase would necessarily lead to (quite a substantial, in some cases) premium over such underlying/purchase assets.
Why do you have to split the assets up inside a special purpose vehicle (SPV)?
You don’t. The reason we did that in the example of BUFs was to make Berkshire Hathaway shares more compartmentalized / affordable and hence to justify our premium a little more. In reality, one could ascribe hard-to-find shares just as easily to the value cash purchase asset attribution process (e.g. UBERX could purchase Uber shares) and there would be a similar premium effect on the value cash instrument.